Friday, July 6, 2007

Here is a cautionary tale of what happens when you ignore illiquid and micro cap stocks, and your investment philosophy. Two years ago I was researching banks and I stumbled across the Pink Sheets web site at

It was a particularly slow day at where I used to work, so I figured why not? I’ll waste a few hours and have a laugh.

After clicking through the site I found the listings page for all pink sheet listed banks. I was stunned to find that there were so many bank stocks that trade off the main exchanges – there were literally hundreds of banks listed here. So I decided to pick one at random. Well it wasn't really at random, it was one in Atlanta, which is nearby where I live so I figured I would take a look at it. It was the North Atlanta National Bank (NANB). It traded both on the OTC Bulletin Board and the Pink Sheets.

It was selling at $10.00 a share, but there was very little news or financial reports on Bloomberg about it. So I dug some more and I found that they had a web site where they post shareholder reports. The bank had a single branch in Fulton County, Georgia. This is a northern suburb of Atlanta that is growing like a weed. I dug further. The loan and deposit growth was unbelievable – a compound annual growth rate of more than 100% since 2000. They were well capitalized.

And then the bombshell hit – its tangible book value was $9.03. I did a double take – was this a misprint? Fast growing, well-capitalized banks don’t sell at tangible book value. So I checked at the government web site where the banks file their call reports, and it was confirmed. So there it was, a fast growing, safe bank selling at slightly over tangible book value and what did I do? Absolutely nothing. I didn’t buy it. It wasn’t liquid enough I said. Its market capitalization was only $10 million. There wasn’t that warm cuddly feeling of being surrounded by other investors. There wasn’t some sell side analyst around to make me feel safe at night while I owned it.

I kept it on my screen though and watched it the next two years. It only traded twice a month but every time it traded it seemed to go up a buck or two. I lost track of it for a while, and the next time I looked it was at $17, and then $22 a few months later.

Then on June 29th, 2007, my nightmare reached a climax as I saw the headline – Shinhan Bank America to acquire North Atlanta National Bank at $23.44 a share. A South Korean bank looking for a foothold in a fast growing American city had bought it.

So what’s the point of all this? There are hundreds of other Pink Sheet and Bulletin Board Stocks out there in Banking and other industries that are being ignored by most mainstream investors. If you do this you will reduce your opportunity set immensely. There are some great stocks here so don't be a moron like me. They are hard to trade sometimes, but if you are a long term investor that shouldn't be a worry.

A great investor once said that there is a lesson to be learned in every mistake and I think I learned from this one.